Enron

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Transcript of Enron

Enron: The CFO, Conflicts and Cooking the Books with Natural Gas and ElectricityDivine Command Theory"Obey God", 10 CommandmentsCriminal investigation into Mark Lay's company's activities but not charged of wrongdoingPaid over $100,000 to settle a civil complaintMark Lay entered a Baptist seminary in Houston with plans to become a ministerCEO Jeff Skilling stated: "We are doing God's work. We are on the side of angels" when questioned about the accounting practices at EnronEthical Egoism Theory"Buy what you want"Holds that we all act in our own self-interest and that all of us should limit our judgement to our own ethical egos and not interfere with the exercise of ethical egoism by others. Everything is determined by self interest.Enron became the largest energy trader in the world and virtually controlled the energy market in the U.S.Utilitarian Theory"Greatest good for greatest number"Margaret CeconiStated in a memo that losses from EES were being moved to another sector in Enron in order to look profitableSent memo to CEO Kenneth Lay and HR with no response or actionResulted in the memo being sent to to the U.S. House of Representatives' Committee on Energy and CommerceSherron Watkins put the entire company and all its employees on the lineShe wrote in her memo, "I know it would be devastating to all of us, but I wish we would get caught".Adam Smith TheoryThe Invisible HandMegan MasseyCandyce MunozBranson ReddingIntroductionBackground on EnronThe Financial Reporting IssuesMark-to-Market AccountingUtilized a financial reporting tool intended to provide insight into the true value of the company through a matching of contracts to market price in commodities with price fluctuationsNumbers for earnings on future contracts are subjective Bonuses and performance ratings were tied to meeting earnings goalsAnalysts concerned about method because of non-cash earnings were over 50% of its revenuesAnalysts were unwilling to ask questionsThe Financial Reporting Issues cont.Off-the-Books EntitiesMinimal disclosure about their off-the-balance-sheet liabilitiesBy the time of collapse, Enron has created about 3,000 off-the-book entities, partnerships, and limited liability companies Created a complex network of these entities and some officers served as principals in these companies and earned commissions for the sale of Enron assets to themAndrew Fastow, CFO, was a principal in many of these off-the-book entitiesRelatives and Doing Business with EnronThe Enron Culture & BoardAfter the FallAn American energy, commodities, and services companyIncorporated in 1985Principal executive offices in Houston, TexasRevenues of nearly $111 billion during 20002001 world's largest energy companyFortune magazine's 100 "Best Companies to Work For" consistentlyFortune named Enron “America’s Most Innovative Company” for six consecutive yearsNovember 2001 filed for bankruptcyEnron's DemiseAfter the FallHobbesian Self InterestKant Categorical ImperativeContractarian & JusticeRights TheoryMoral RelativismVirtue EthicsBegan as a merger of two pipelinesTrade in energy and offer electricity for sale around the country by locking in supply contracts at fixed prices and then hedging on those contracts in other marketsFirst mover in this market which lead to huge growthStrategy to grow 15% per yearOnline trading of energy had 1,800 contractsControlled the energy market in the U.S.Employees had their 401(k)s invested heavily in Enron's stockDiversification lead to disasters and decrease in earningsSeries of transactions authorized by Mr. Lay in which Enron did business with companies owned by Mr. Lay's son, Mark, and his sister, Sharon Lay Criminal investigation into activities of a company founded by Mark LaySharon Lay owned a Houston travel agencyMs. and Mr. Lay say they made all the necessary disclosures to the board and regulators about their business with EnronDecline began in November-December 2000Share price was at $85Skilling left as CEO in 2001 and share price fell to $43Wall Street Journal raised questions about Enron's disclosures in August a they began selling off assetsBy October, disclosed a third-quarter loss and a $1.2 billion reduction in shareholder equityCFO Fastow terminatedRestated earnings to $586 million, or 20%, reductionCEO Kenneth Lay left the company but remained chairman of boardAggressive culture and rating systemEmployees became suspicious of aggressive accountingFastow believed he was doing everything right in helping Enron make the numbersNear the end, he encouraged others to reveal the true financial pictureMembers of Enron's board were well compensated with a total of $380,619 paid to each director in cash and stock for 2001Enron fired 5,100 of its 7,500 employees by December 3, 2001Each employee received a $4,500 severance package 60% of 401(k) plans were invested in EnronEmployees 401(k) plans were cut so much they could not retireJust before declaring bankruptcy Enron paid out $55 million in bonuses to executives Clifford Baxter committed suicideEnron put a lock down on employees so they could not sell their shares The Enron collapse created a world ripple effect5 major Japanese money market funds fell below face value 28,500 contracts scrambled to find new providers Effect every large investment bank in America Ground breaking ceremony for Enron's new headquarters was halted Stephen Cooper was hired to replace Ken Lay as CEOThe collapse ended movement towards deregulating electricity Mr. Lay died of a massive heart attack one month after being convicted The collapse of Enron influenced the creation of the Sarbanes-Oxley (SOX) of 2001Establish accountability requiring CEOs to sign off on financial reports "I should do what I want everyone to do", Golden Rule"You should not use other human beings that result in a one sided benefit"Do not engage in fraud because you don't want to get caught How would Enron executives feel if they worked 25 years and lost all their retirement funds? "Respect others' rights"Enron executives showed no respect towards employeesManipulating employees to make another dollar "Do what seems right at the time"Culture encouraged aggressivenessCorrupt in that Enron valued financial reporting rather than economic reportingBonuses and performance ratings were tied to meeting earnings goalsFormer CFO Fastow believed he was a hero for Enron. At the time, he stated he thought he was helping himself and helping Enron to make its numbers."Do what's good"An employee with Enron energy services, Margaret Ceconi, wrote a 5 pg memo to Kenneth Lay stating losses from one sector were being moved to another sector. Employees voiced concerns in online chat rooms about their suspicions with regards to the "aggressive accounting" that was taking place. "Follow the rules"Enron did not follow the rules due to making minimal disclosures about their off-the- balance-sheet liabilities. Disclosure requirements under GAAP and FASB kicked in at 50 percent ownership at the time. By the time of the collapse, 3000 off-the-book entities had been created. Since Enron's ownership never exceeded 49% in the entities, the debt and obligations in off-the book-entities did not have to disclosed. Convictions "Buy whatever is legal"Self interest is part of human nature but laws must be in place to controlGovernment realizes that corporations and companies could behave unethically just for money Enron executives deliberately attempted to falsify and fabricate financial reports for the sake of making bigger profits"Long-term greed"Enron believed they could lie in their financial statements to get aheadTemporary benefit from falsifying records and creating undisclosed SPEsEnron could not keep up with the pattern of dishonest behavior which lead to the bankruptcy and publicity of scandal